You should read the following discussion in conjunction with our condensed consolidated financial statements, which are included in Item 1 of this Form 10-Q.

Company Overview

In 2007, Quepasa transitioned from being a bilingual search engine into a bilingual portal and Hispanic social network. With the evolution of our website into a Hispanic portal and social network, we expect future revenues will come from predominately display advertising. In December 2006, the portal service of Quepasa was discontinued.

Highlights for the first three quarters of 2008 included:

·

In late January 2008, we borrowed $7,000,000, including $5,000,000 from a company controlled by one of our non-employee directors. The notes are due in 2016;

·

On February 6, 2008, we re-launched our website as a Hispanic social network;

·

On June 30, 2008, we terminated the CSMSA issuing the Organization $2,500,000 of Preferred Stock and recorded a one-time non-cash gain of $5,056,052 based upon the difference between the value of the liabilities we eliminated and the value of the Preferred Stock; and

·

Our website traffic began to show growth as the third quarter evolved. In part, this was due to our improved ability to deliver emails inviting persons to become members of Quepasa.

Critical Accounting Policies, Judgments and Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with Generally Accepted Accounting Principles. The preparation of these condensed consolidated financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimate that are reasonably likely to occur, could materially impact the consolidated financial statements. We believe that the following critical accounting policies reflect the more significant estimates and assumptions used in the preparation of the consolidated financial statements.

Management has discussed the development and selection of these critical accounting estimates with the Audit Committee of our Board of Directors. In addition, there are other items within our financial statements that require estimation, but are not deemed critical as defined above. Changes in estimates used in these and other items could have a material impact on our financial statements.

Stock-Based Compensation Expense

See Note 9 - Stock-Based Compensation to our condensed consolidated financial statements included in Item 1 of this Form 10-Q for discussion of stock-based compensation expense.

Contingencies

The Company accrues for contingent obligations, including estimated management support agreements and legal costs, when the obligation is probable and the amount can be reasonably estimated. As facts concerning contingencies become known we reassess our position and make appropriate adjustments to the financial statements. Estimates that are particularly sensitive to future changes include those related to tax, legal, and other regulatory matters that are subject to change as events evolve and additional information becomes available.

The Company uses the asset and liability method to account for income taxes. Under this method, deferred income taxes are determined based on the differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements which will result in taxable or deductible amounts in future years and are measured using the currently enacted tax rates and laws. A valuation allowance is provided to reduce net deferred tax assets to the amount that, based on available evidence, is more likely than not to be realized.

Results of Operations

Revenue Sources

During the nine months ended September 30, 2008, our revenue was generated from two principal sources: revenue earned from the sale of banner advertising on our website and subscription sales.

Banner Advertising Revenue: Banner advertising revenue is generated when an advertiser purchases a banner placement within our quepasa.com website. We recognize revenue related to banner advertisements upon delivery. Approximately 80% of our revenue came from banner advertising.

Subscription Sales: Subscription sales related to the Internet dating service Corazones.com. We have not focused our efforts on marketing this website. We recognize revenue from subscription sales as services are delivered, or ratably over the subscription period.

Operating Expenses

Our principal operating expenses are divided into the following categories:

·

Product Development and Content Expenses: Product development and content expenses consist of personnel costs associated with the development, testing and upgrading of our website and systems, content fees, and purchases of specific technology, particularly software and hardware related to our infrastructure upgrade.

·

Sales and Marketing Expenses: Sales and marketing expenses consist primarily of salaries and expenses of marketing and sales personnel, and other marketing-related expenses including our mass media-based branding and advertising.

·

General and Administrative Expenses: General and administrative expenses consist primarily of costs related to corporate personnel, occupancy costs, general operating costs and corporate professional fees, such as legal and accounting fees.

·

Stock Based Compensation Expenses: Stock based compensation is a non-cash expense that consists primarily of compensation paid for employees, directors, and consultants by the issuance of stock options or common stock. Expense is calculated based upon the grant-date fair value using the Black-Scholes option pricing model recognized on a straight-line basis over the vesting term of the award.

·

Depreciation and Amortization Expenses: Our depreciation and amortization are non-cash expenses which have consisted primarily of depreciation related to our property and equipment and the amortization pertaining to jet rights acquired in 2006 and disposed in 2008.

·

Other Income (Expense): Other income (expense) consists primarily of interest earned, interest expense and earned grant income. We have invested our cash in AAA rated, fully liquid instruments. Interest expense relates to our Corporate Sponsorship Agreement and Note Purchase Agreements discussed in notes 5 and 6. Earned grant income represents the amortized portion of a cash grant received from the Mexican government for approved capital expenditures. The grant is being recognized on a straight-line basis over the useful lives of the purchased assets. In the nine months ended September 30, 2008, we recognized a one-time non-cash gain resulting from termination of the CSMSA.

The following table sets forth a modified version of our Condensed Consolidated Statements of Operations and Comprehensive Loss that is used in the following discussions of our results of operations:

                                                 For the the three months ended September 30,
                                            2008             2007          Change ($)       Change (%)

REVENUES                                $     10,989     $     64,197     $    (53,208 )            -83 %

CASH-BASED OPERATING EXPENSES
Sales and marketing                           54,896          147,772          (92,876 )            -63 %
Product development and content              658,051        1,667,768       (1,009,717 )            -61 %
General and administrative                   380,098        1,422,224       (1,042,126 )            -73 %
Total cash-based operating expenses        1,093,045        3,237,764       (2,144,719 )            -66 %

NET CASH BURN                             (1,082,056 )     (3,173,567 )      2,091,511              -66 %
Net Cash Monthly Burn Rate                  (360,685 )     (1,057,856 )        697,170              -66 %

NON-CASH OPERATING EXPENSES
Stock based compensation expense           2,278,231          312,564        1,965,667              629 %
Depreciation and amortization                113,710          127,559          (13,849 )            -11 %
Total Non-Cash Operating Expenses          2,391,941          440,123        1,951,818              443 %

LOSS FROM OPERATIONS                      (3,473,997 )     (3,613,690 )        139,693               -4 %

OTHER INCOME (EXPENSE):
Interest income                               34,544           88,779          (54,235 )            -61 %
Interest expense                            (151,502 )              -         (151,502 )           -100 %
Gain/ (Loss) on disposal                           -            2,829           (2,829 )           -100 %
Other income                                 511,371            7,130          504,241             7072 %
TOTAL OTHER INCOME (EXPENSE)                 394,413           98,738          295,675              299 %

NET INCOME (LOSS)                       $ (3,079,584 )   $ (3,514,952 )   $    435,368              -12 %

Revenues

Our revenues were $10,989 for the three months ended September 30, 2008, a decrease of 83% compared to the third quarter of 2007. In September 2007, we launched a new beta version of our website, which experienced technical difficulties and performance issues that adversely affected the amount of traffic visiting our website. In late October 2007, a new senior management team was put into place and immediately began to address the performance issues with the website. The bulk of the banner advertising campaigns were discontinued in the fourth quarter of 2007, and efforts to generate additional banner advertising campaigns were temporarily put on hold while emphasis was placed on enhancing the functionality and the content of our website, in order to drive sustained traffic to the site. In February 2008, we re-launched our website. We experienced a 222% increase in page views during the second quarter of 2008 from the first quarter of 2008, and a 316% increase in page views during the third quarter 2008 from the second. We are hopeful that website traffic will continue to increase in the fourth quarter of 2008. We believe there will be a direct correlation between website traffic and our ability to increase revenue.

As part of our website development strategy, we have focused on establishing a platform for sustained, viral growth-based on (i) simple user registration and invitation process; and (ii) effective email deliverability. In June, 2008, we redesigned the sign-up and invitation pages of our site, resulting in approximately a 50% increase in the number of new users who invited friends and contacts to join Quepasa.com. In addition, with the help of a third-party consultant, we have substantially reduced the number of Quepasa.com invitation emails that fail to reach recipients' email inboxes. Improved deliverability, together with the redesign of our sign-up and invitation steps, has resulted in meaningful gains in the number new registered users and site traffic.

Sales and Marketing: Sales and marketing expenses decreased $92,876, or 63%, to $54,896 for the three months ended September 30, 2008. The decrease is primarily attributed to the closing of the New York sales office and a reduction of our sales force in November 2007, which resulted in a decrease in salaries of approximately $133,000 versus the third quarter of 2007.

Product Development and Content: Product development and content expenses decreased $1,009,717, or 61%, to $658,051 for the three months ended September 30, 2008. This decrease is attributable to a focused effort to reduce costs. During the three months ended September 30, 2008, we had decreases in technology consulting fees of $785,000, salaries within our U.S. operations of $180,000, other professional fees of $84,000 and content fees of $44,000, partially offset by an increase in salaries and associated payroll costs of $59,000 for our product development and technology personnel within Quepasa.com de Mexico, which, under the direction of our U.S.-based Chief Technology Officer, provides substantially all of our design, translation services, and website management and development services.

General and Administrative: General and administrative expenses decreased $1,042,126, or 73%, to $380,098, for the three months ended September 30, 2008. The significant changes consisted of:

·

a decrease in professional fees of $430,000, primarily made up of decreases in legal fees of $218,000 and accounting fees of $139,000, due to unusually high activity in 2007;

·

a decrease in recruiting fees of $46,000, due to reduced hiring during 2008;

·

a decrease in travel related expenses of $174,000;

·

a decrease in rent expenses of $75,000, due to the closing our Scottsdale, AZ headquarters;

·

a decrease in salaries and related payroll costs of $216,000, due to a reduction in personnel in our Scottsdale headquarters during the fourth quarter of 2007 and reduction of some salaries in exchange for stock based compensation; and

·

a decrease in dues and subscriptions of $46,000, a decrease in printing and reproduction of $15,000, and a decrease in office supplies and maintenance costs of $16,000 attributable to a focused effort to reduce costs;

Stock Based Compensation: Stock based compensation expense increased $1,965,667 to $2,278,231 for the three months ended September 30, 2008. This increase is attributable to stock options issued to the new senior management team hired during the fourth quarter of 2007 and the first quarter of 2008, a performance based incentive grant made in the third quarter of 2008, and a shift toward issuing stock based compensation to reduce other cash expenses. At September 30, 2008, we had $9,737,442 of unrecognized stock based compensation expense, almost all of which we expect to recognize over the next eight quarters.

Depreciation and Amortization: Depreciation and amortization expense decreased $13,849, or 11%, to $113,710 for the three months ended September 30, 2008. This decrease is primarily attributable to the termination of the jet rights in the first quarter of 2008 and the associated amortization expense.

Other Income (Expense): Other income increased $295,675 to $394,413 for the three months ended September 30, 2008. The increase is mainly attributable to the write-off of invoices totaling $508,610 initially recorded in the third quarter of 2007 for a technical consultant. The gain was partially offset by $152,000 of interest expense associated with the Note Purchase Agreements entered into in the first quarter of 2008 (see note 6 of the condensed consolidated financial statements) and a decrease of $54,000 of interest income associated with lower average cash balances during the third quarter of 2008 versus the third quarter of 2007.

The following table sets forth a modified version of our Condensed Consolidated Statements of Operations and Comprehensive Loss that is used in the following discussions of our results of operations:

                                                  For the the nine months ended September 30,
                                            2008             2007           Change ($)       Change (%)

REVENUES                                $     42,626     $     189,939     $   (147,313 )            -78 %

CASH-BASED OPERATING EXPENSES
Sales and marketing                          190,568           909,876         (719,308 )            -79 %
Product development and content            1,910,350         3,710,821       (1,800,471 )            -49 %
General and administrative                 1,830,782         4,628,814       (2,798,032 )            -60 %
Total cash-based operating expenses        3,931,700         9,249,511       (5,317,811 )            -57 %

NET CASH BURN                             (3,889,074 )      (9,059,572 )      5,170,498              -57 %
Net Cash Monthly Burn Rate                  (432,119 )      (1,006,619 )        574,500              -57 %

NON-CASH OPERATING EXPENSES
Stock based compensation expense           4,840,489         1,416,149        3,424,340              242 %
Depreciation and amortization                335,133           323,820           11,313                3 %
Total Non-Cash Operating Expenses          5,175,622         1,739,969        3,435,653              197 %

LOSS FROM OPERATIONS                      (9,064,696 )     (10,799,541 )      1,734,845              -16 %

OTHER INCOME (EXPENSE):
Interest income                              132,048           380,603         (248,555 )            -65 %
Interest expense                            (779,315 )               -         (779,315 )           -100 %
Gain/ (Loss) on disposal                     (42,977 )           6,278          (49,255 )           -785 %
Gain on extinguishment of debt             5,056,052                 -        5,056,052              100 %
Other income                                 530,850            21,367          509,483             2384 %
TOTAL OTHER INCOME (EXPENSE)               4,896,658           408,248        4,488,410             1099 %

NET INCOME (LOSS)                       $ (4,168,038 )   $ (10,391,293 )   $  6,223,255              -60 %

Revenues

Our revenues were $42,626 for the nine months ended September 30, 2008; a decrease of 78% compared to the nine months ended September 30, 2007. In September 2007, we launched a new beta version of our website, which experienced technical difficulties and performance issues that adversely affected the amount of traffic visiting our website. In late October 2007, a new senior management team was put into place and immediately began to address the performance issues with the website. The bulk of the banner advertising campaigns were discontinued in the fourth quarter of 2007, and efforts to generate additional banner advertising campaigns were temporarily put on hold while emphasis was placed on enhancing the functionality and the content of our website, in order to drive sustained traffic to the site. In February 2008, we re-launched our website. We experienced a 222% increase in page views during the second quarter of 2008 from the first quarter of 2008 and a 316% increase in page views during the third quarter 2008 from the second. We are hopeful that website traffic will continue to increase in the fourth quarter of 2008. We believe there will be a direct correlation between website traffic and our ability to increase revenue.

Operating Costs and Expenses

Sales and Marketing: Sales and marketing expenses decreased $719,308, or 79%, to $190,568 for the nine months ended September 30, 2008. The decrease is primarily attributed to the discontinuance of advertising efforts in the first nine months of 2008, which resulted in savings of approximately $456,000 versus the first nine months of 2007. In addition, we closed the New York sales office and reduced our sales force in November 2007, which resulted in a decrease in salaries of approximately $300,000 versus the first nine months of 2007.

General and Administrative: General and administrative expenses decreased $2,798,032, or 60%, to $1,830,782 for the nine months ended September 30, 2008. The significant changes consisted of:

·

a decrease in professional fees expense of $1,263,000, primarily made up of decreases in legal fees of $524,000 and accounting fees of $528,000, due to unusually high activity in 2007, and a settlement of $135,000 toward legal fees received during the second quarter of 2008;

·

a decrease in recruiting fees of $481,000, due to reduced hiring during 2008;

·

a decrease in salaries and related payroll costs of $343,000, due to a reduction in personnel in our Scottsdale headquarters during the fourth quarter of 2007 and reduction of some salaries in exchange for stock based compensation; and

·

a decrease in travel related expenses of $349,000, a decrease in dues and subscriptions of $123,000, a decrease in printing and reproduction of $89,000, a decrease in office supplies and maintenance of $51,000, a decrease in licenses and fees of $17,000, a decrease in insurance costs of $35,000, and a decrease in other general and administrative costs of $50,000, attributable to a focused effort to reduce costs.

Stock Based Compensation: Stock based compensation expense increased $3,424,340, or 242%, to $4,840,489 for the nine months ended September 30, 2008. This increase is attributable to stock options issued to the new senior management team hired during the fourth quarter of 2007 and the first quarter of 2008, a performance based incentive grant made in the third quarter of 2008, and a shift toward issuing stock based compensation to reduce other cash expenses. At September 30, 2008, we had $9,737,442 of unrecognized stock based compensation expense, almost all of which we expect to recognize over the next nine quarters.

Depreciation and Amortization: Depreciation and amortization expense increased $11,313, or 3%, to $335,133 for the nine months ended September 30, 2008. This increase is attributable to the depreciation associated with capital purchases from 2007, offset by the termination of the jet rights in the first quarter of 2008 and the associated amortization expense.

Other Income (Expense): Other income increased $4,488,410 to $4,896,658 for the nine months ended September 30, 2008. The increase is primarily attributable to a gain on extinguishment of debt of $5,056,052 recorded in the second quarter of 2008 as a result of the termination of the CSMSA discussed in Note 5 of the condensed consolidated financial statements and the write-off of invoices totaling $508,610 initially recorded in the third quarter of 2007 for a technical consultant. The gains were partially offset by $779,000 of interest expense associated with the CSMSA and the Note Purchase Agreements entered into in the first quarter of 2008 (see note 6 of the condensed consolidated financial statements), a decrease of $249,000 of interest income associated with lower average cash balances during the first nine months of 2008 versus the first nine months of 2007, and a $43,000 loss recorded in the second quarter of 2008 on the disposal of office furniture and equipment associated with the shutdown of our Scottsdale, AZ headquarters.

Liquidity and Capital Resources


                                                     For the Nine months Ended
                                                           September 30,
                                                       2008              2007
     Net cash used in operating activities         $ (4,301,066 )    $ (8,207,238 )
     Net cash used in investing activities         $   (770,533 )    $   (729,437 )
     Net cash provided by financing activities     $  7,337,019      $    913,150

Net cash used in investing activities for the nine months ended September 30, 2008 is primarily attributable to Investment in BRC/La Alianza of $350,000, see note 4 of the condensed consolidated financial statements. Our capital expenditures were $420,533 for the nine months ended September 30, 2008, compared to capital expenditures of $729,437 for the same period in 2007.

Net cash provided by financing activities for the nine months ended September 30, 2008 came from net proceeds of $6,959,519 from our borrowing in January 2008. See note 6 of the condensed consolidated financial statements. Cash proceeds from the exercise of stock options and warrants was $377,500 for the nine months ended September 30, 2008, compared to $913,150 for the same period in 2007.

                                          September 30,        December 31,
                                              2008                 2007
          Cash and cash equivalents      $     5,945,533      $    3,673,281
          Total assets                   $     7,869,387      $    5,900,908
          Percentage of total assets                  76 %                62 %
. . .